Liquidity Trap in an Inflation-Targeting Framework: A Graphical Analysis

27 Pages Posted: 7 Jul 2010 Last revised: 6 May 2012

See all articles by Pavel S. Kapinos

Pavel S. Kapinos

Federal Reserve Bank of Dallas--Financial Industry Studies

Date Written: October 1, 2009

Abstract

This paper presents a simple inflation-targeting model with alternative assumptions regarding the conduct of monetary policy. The central bank is assumed to either follow a Taylor rule or minimize a social welfare loss function. The model can be tractably described by means of a straightforward graphical apparatus, which, so far, has not been extended to include the treatment of the liquidity trap. The paper presents an analysis of the zero nominal interest rate bound using this apparatus and discusses the implications of preemptive monetary easing when the macroeconomic conditions suggest that the bound may restrict future monetary policy effectiveness.

Keywords: Inflation Targeting, Liquidity Trap, Zero Interest Rate Bound, Preemptive Monetary Policy

JEL Classification: A22, E52, E58

Suggested Citation

Kapinos, Pavel S., Liquidity Trap in an Inflation-Targeting Framework: A Graphical Analysis (October 1, 2009). Available at SSRN: https://ssrn.com/abstract=1635266 or http://dx.doi.org/10.2139/ssrn.1635266

Pavel S. Kapinos (Contact Author)

Federal Reserve Bank of Dallas--Financial Industry Studies ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

HOME PAGE: http://https://sites.google.com/site/pavelkapinos/

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